6 Stages of Investing: Legally and Ethically Structuring Deals

Hey, hey, hey! Cody Sperber here back with another installment in our epic series, 6 Stage of Investing, which started way back here with Part 1. We’re powering through Stage 5 where our focus is on strategy and funding, and fingers crossed you guys are applying the lessons you’re learning and rocking the investment world.

Before we move forward, let’s take a quick moment to run it back… our previous post was all about financing options and getting creative with those options. If you weren’t familiar with the phrase “Sub 2,” now you’re probably dropping it into conversations with fellow investors and maybe even putting it into practice like a pro.

And before financing options came the four types of deals and four types of funding. Knowing your options when it comes to deals and funding is a major stepping stone in the journey to becoming a transactional engineer.

Let’s pick up this series by changing gears a bit – with an interesting discussion about the legalities involving how you structure your deals…

Is Creative Deal Structuring Legal?

So by now, you may be wondering: “Is all this even legal?” Or perhaps someone you’ve spoken with about a deal has asked you that question. How in the world are investors able to concoct creative solutions (like Sub 2s) for investing that are legal?

I assure you that everything we’ve covered and will continue to talk about is absolutely, 100% without a doubt – perfectly legal.

Now, is there gray area anywhere? Sure… but the good news is that the not-quite black and not-quite white areas that you need to concern yourself with aren’t likely to happen. In other words, the gray area is low risk.

So where are these gray areas and what do they mean for you?

Well, if the gray areas surface, the bank can call the note due. I’ll get into the nitty gritty of what that means for you, the investor, in a hot second, but first let’s talk about some possible scenarios that might make the bank pull rank:

1. If your seller violates his or her “due on sale clause,” which simply states that if any part of the property transfers in any way, shape or form without the lender’s approval, the bank has the right to call the note due.
2. If interest rates sky rocket, the bank may want to lend money at those higher rates, so they’ll call the note due.
3. If payments aren’t made, the bank will audit the loan to find out why (naturally), and chances are they’ll call the note due.

So what happens if the bank does call the note due? Don’t panic and run for the hills. If the lender accelerates the loan for one reason or another, you can…

1. Fight back (I don’t advise this… like, at all. Just don’t.)
2. Borrow money from a private lender, because you already have a history in the property with cash flowing.
3. Ask the bank for a conventional financing deal, and then refinance out the loan.
4. Tell the seller (worst case) that you’re going to deed the property back.

Most of these options will sting a bit, especially the last one, but the point is… you always have options.

Will I be able to Sleep at Night?

So we know these processes are legal (whew!), but are they ethical?

Here’s the bottom line….

Always, always (did I say always?) work your deals with the intent to ease your seller’s stress and solve their problem. Do the right thing, and listen to that voice in your head or the twinge in your gut if you find yourself teetering on the edge of deception. Don’t make false statements. Don’t encourage your seller to be dishonest to anyone, ever.

And above all else… are you ready for this? (drumroll)

Don’t be a jerk.

Find Common Ground & Have Common Sense

Being the good guy AND profiting because of it is a freaking awesome combination!

Get on the same page with your seller, disclose everything and make sure all disclosures are signed and mutually agreed upon. Get the property insured, and keep the lines of communication open.

Know that you’re absolutely working deals that are legal, but be sure to take my advice when it comes to the ethical part. Be genuine, be honest and feel confident that you’re working through your deals ethically.

For most of us… this should be a no-brainer but it’s certainly worth mentioning.

Well, investors…

Thanks for hanging with me once again, and stay tuned for our next installment where we’ll discuss seller financing, wrap-around mortgages (sounds fun, right?), and wholesaling.

Until then, stay classy.